Accounting Aspects of International
Reserves and Gold
Banco de la República de Colombia
Regional Conference on Banking, Accounting, and Finance
Santiago de Chile
April 2019
Yadira Duarte
1. Introduction
2. Accounting Framework of Central Bank.
3. Accounting policies of the Central Bank applicable to
financial instruments, particularly to:
The Investment Portfolio of the International Reserves.
Gold
Agenda
1. Introduction
Introduction
The purpose of this presentation is to describe the accounting
practices applied by the Central Bank to financial instruments
that are part of the international reserves and the treatment of
gold.
Accounting Framework applied by the
Central Bank
Sources of Accounting Regulation based on the following Standards:
Issued by the National Government
Provided by the Office of the Financial Superintendent for entities in the financial sector and
the Central Bank.
As per the Law and the Bylaws of the Central Bank.
Accounting framework of Banco de la República
Until 2014
Modernization of the Accounting Framework of the Central Bank
Since 2015
Framework based
on IFRS
Starts the process of convergence to IFRS in Colombia.
Accounting model for Banco de la República
Act 1314 of 2009
Joint study between the
National Accountant General
for the public sector and the
Office of the Financial
Superintendent of Colombia
(FSC).
IFRS with exceptions:
Norms that are contrary to
its special regime (as per
the Law and the Bylaws of
the Central Bank).
Treatment of credit portfolio
and its deterioration.
(Special rules issued by the
FSC are applied).
The Central Bank does not produce any explicit statement of compliance with IFRS.
Accounting Policies of the Central Bank
applicable to Financial Instruments
Treatment of Financial Instruments
Financial instruments are classified depending on their intent and capability of management, addressing the following premises:
1. The characteristics of the contractual cash flows of a financial asset (its existence).2. How the entity manages its financial assets (Business Model).
Management Model and Characteristics
of the InstrumentClassification
Assets held for obtaining (i) contractual cash flows and (ii) to be sold prior to maturity, but not
in the short term.
Assets held for contractual cash flows in future dates, throughout the life of the instrument more than to sell the instrument before the due date.
Fair value with changes in OCI / Equity
Amortized Cost(Effective Interest Rate
Method)
Cla
ssif
icat
ion
an
d R
eco
gn
itio
n
Assets for short term sale and benefits of change in fair value (fair value gains).
Fair value with changes in results
Recognition of Gains
and Losses
Results of the period - TIR yields- Realized Results- DeteriorationEquity (OCI)- Market Variations
Result of the period
Period Results
International Reserves
International
Reserves
(IR)
Concept Characteristics
Definition and
Characteristics
Objective
The IR are assets abroad controlled by the monetary authority,
which:
(i) Are under the direct and effective control of the monetary
authority and,
(ii) Are available for immediate use.
To maintain an adequate level of assets in foreign currencies,
available to intervene in the foreign exchange market and
facilitate access of the public and private sector to international
capital markets.
Composition
1) Investment Portfolio excluding Monetary Gold (94.7%)
2) Gold (1.5%)
3) Contributions to supranational entities (IMF, FLAR) and
contribution to international conventions (ALADI). (3.5%)
4) Cash (0.4%)
International Reserves
Determination of Accounting Policy - Classification and Measurement
1. Cash-Flow Assessment
Fixed-Income
Instruments
o Securities
o Discount Securities
o Certificates of Deposit
Derivatives
o Currency Forwards
o Bonds and Interest Rates
Futures
Monetary Gold o Gold Stocks
Without Cash
Flows
With Cash
Flows
Business
Model
Assessment
Investm
ent P
ortfolio
International Reserves
2. Business Model Assessment
Assessment Criteria Observations
1.
Objectives and
Composition
3.
Sales Volumes
1.Objective
Maintain an adequate equity level to meet the
objectives of the IR efficiently
Short-Term Tranche
Cover potential liquidity needs of the reserves
up to 12 months
Significant sales volume
2. Composition
o Investment Portfolio and Gold.
o Contributions to entities and international
organizations (IMF, FLAR, ALADI).
Medium-Term Tranche
Maximize profitability.
Runs with a time limit and a profile of expected
profitability of over 12 months
Implementation of different strategies:
o Review of benchmarks.
o Rebalancing
2.
Purpose of the Tranches
Management parameters of portfolios to meet
the objectives
Policies addressed to the preservation of
capital, showing the intent to obtain higher
yields through sales as well as of through
contractual cash flows.
4.
Risk Parameter
International Reserves
Assessment Criteria Observations
5.
Basis for Management
Decision Making
6.
Performance Evaluation
The administration of the Central Bank focuses mainly on
information of reasonable value for decision-making.
Documents constructed through this information
How is the performance of the administrators of the Central Bank’s
portfolio assessed and how is it related to remuneration (including
compensation)?
Absolute and relative returns and their attribution based onmarket factors of the portfolios that make up theinternational reserves.
Market risk indicators of the aggregate portfolio of theinternational reserves
Annual assessment of the active administrators of thereserves including excess returns on the portfolioscompared with their corresponding indexes.
Documents with proposals on strategic asset compositionfor trenches of the international reserves, using return andrisk estimates and restrictions established related to thevaluation at market prices.
Regarding the portion of the reserves that is delegated toexternal managers, both the assessment and the compensationdepend on the valuation of the portfolio at market prices andtheir relative profitability compared to the reference index.
The activities carried out for the administration of the IR establish that the aim of the management model is to
collect cash flows through the sale of assets, and to take decisions based on the fair values and their management
to obtain profit from the fair values.
Business ModelFair Value with
Changes to Results
Treatment of International Reserves
Legal Restrictions
The Bylaws of the Central Bank establish the following in paragraph 4 of
Article 62:
"4. The international reserves should be accounted for at market rate. The
exchange adjustment of the international reserves caused by fluctuations in
the exchange rate of the peso vis-à-vis the currencies in which they are
represented shall be recorded as a surplus (equity). The unfavorable
adjustment of the exchange rate will apply to said surplus (equity). The
variations in international reserves generated by changes in the prices of
investments will constitute revenues and expenditures of the Bank."
As a result, should the business model applicable to the IR be otherwise,
then the Bylaws of the Central Bank would need to be modified.
International Reserves
Determination of Accounting Policy - Classification and Measurement
1. Assessment of Cash Flows
Fixed-Income
Instruments
o Securities
o Discount Securities
o Certificates of Deposit
Derivatives
o Currency Forwards
o Bonds and Interest
Rates Futures
Gold o Gold Stocks
With Cash
Flows
Investm
ent P
ortfolio
Without
Cash Flows
Without
Cash Flows
Fair Value
with
Changes to
Results
Fair Value with Changes to
Results
Assessment
of Treatment
Busin
ess
Model
Treatment of Gold
Monetary Gold
Certified Gold kept abroad.
Is part of the International
Reserves (IR).
Non-Monetary Gold
Is not part of the IR.
Is used in internal purchase
and sale operations or for
export.
Classification Characteristics Classification
Financial instruments
Gold
Cultural Asset
(Historical)
Is not part of the IR.
Is used to comply with the
missionary function related
to cultural activity.
Historical, artistic and
cultural heritage assets
Measurement
Fair Value
Historical cost
Other assets
Fair Value
Treatment of Gold
Monetary
Gold
Certified Gold kept abroad.
Is part of the International
Reserves (IR).
Classification Characteristics Classification
Financial instrument1
Category:
At Fair Value with Changes in
Results.
Measurement
Fair Value
International Price FIX
AM Stock (London).
According to IFRS 9 Application Guide, Section B.1, inasmuch as monetary gold does not represent a rightand does not have a liability as a counterpart, as required by the definition of a financial asset, suggests theclassification as INVENTORY; being considered as a commodity.
1 Justification for the Treatment of Gold as a Financial Instrument:
Being part of the assets of the international reserves (Statutory Act of the Central Bank).Gold was incorporated as an eligible asset within the estimate of the reference index of the two reservetranches, in order to take into account the market risk incurred with the holdings of gold. I.e., it wasincorporated to take in to account its volatility and correlation compared to other reserve assets.
Treatment of Gold
Non-Monetary Gold
Is not part of the IR.
Is used in internal purchase
and sale operations or for
export.
Classification Characteristics Classification Measurement
Other assets
Fair Value
International Price FIX
AM Stock (London).
Justification of the Classification and Measurement
Does not comply with the specifications required to be monetary gold. By recognizing gold at its historical cost (or net realizable value, if less), would not be a fair
presentation in the FS. (NIC 1, p. 19, and conceptual framework).
Treatment of Gold
Monetary
Gold
Certified Gold kept Abroad.
Is part of the International
Reserves (IR).
Non-Monetary
Gold
Is not part of the IR.
Is used in internal purchase
and sale operations or for
export.
Classification Characteristics Classification
Financial instruments
In the category:
At Fair Value with Changes in
Results.
Gold
Cultural Asset
(historical)
Is not part of the IR.
Is used to comply with the
missionary function related
to cultural activity.
Historical, artistic and
cultural heritage assets
Measurement
Fair Value
International Price FIX AM
Stock (London).
Historical Cost.
International Public Sector
Accounting Standards
IPSAS 17
Other assets
Fair Value
International Price FIX AM
Stock (London).
Recognition of Results
Financial Instruments and Non-Monetary Gold Revenue
Total Comprehensive Financial
Statement
Changes in Market Prices.(IR portfolio including
Monetary Gold)
Equity
(Surplus)
Exchange-Rate Fluctuations IR portfolios, including
Monetary Gold
Total Comprehensive Financial
Statement
Non-Monetary Gold Subsequent Measurement
In line with IFRS 9 Financial
Instruments.
Bylaws of the Central Bank.
Exception from the Law and Bylaws of
the Central Bank.
Treatment of Distribution of Results
International Reserves Portfolio(including Monetary Gold)
1 Variations due to exchange-rate fluctuations are retained in equity (surplus), nottransferred to results when realized.
Concept Distributes Retains
Market Price Variations X
Exchange-Rate Fluctuations1 X
Position and Study for the Application of New Policies
The Central Bank is currently assessing the followingmechanisms to retain non-realized profit:
Creation of an equity reserve equivalent to non-realized results.
Adoption1 of the Guide issued by the World Gold Councilregarding:
o Recognition: Financial Instrument.o Measurement: treating the difference in change and the
market price variations as one valuation input.
o Recognize unrealized earnings and losses in equity.
1 As allowed by IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors.”
Thank you for your attention.